Switching Varma Term Structure Models - Extended Version

54 Pages Posted: 24 Sep 2010

See all articles by Alain Monfort

Alain Monfort

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST); National Bureau of Economic Research (NBER); Maastricht University

Fulvio Pegoraro

Banque de France - Economics and Finance Research Center; CREST - Laboratoire de Finance et Assurance

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2007

Abstract

The purpose of the paper is to propose a global discrete-time modeling of the term structure of interest rates able to capture simultaneously the following important features: (i) an historical dynamics of the factor driving term structure shapes involving several lagged values, and switching regimes; (ii) a specification of the stochastic discount factor (SDF) with time-varying and regime dependent risk-premia; (iii) explicit or quasi explicit formulas for zero-coupon bond and interest rate derivative prices; (iv) the positivity of the yields at each maturity. The first family of models we develop is given by the Switching Autoregressive Normal (SARN) and the Switching Vector Autoregressive Normal (SVARN) Factor-Based Term Structure Models of order p. The second family of models we study is given by the Switching Autoregressive Gamma (SARG) and the Switching Vector Autoregressive Gamma (SVARG) Factor-Based Term Structure Models of order p. Regime shifts are described by a Markov chain with (historical) non-homogeneous transition probabilities.

Keywords: Affine Term Structure Models, Stochastic Discount Factor, Car processes, Switching Regimes, VARMA processes, Lags, Positivity, Derivative Pricing

JEL Classification: C1, C5, E43, G12

Suggested Citation

Monfort, Alain and Pegoraro, Fulvio, Switching Varma Term Structure Models - Extended Version (December 1, 2007). Banque de France Working Paper No. 191, Available at SSRN: https://ssrn.com/abstract=1681468 or http://dx.doi.org/10.2139/ssrn.1681468

Alain Monfort (Contact Author)

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST) ( email )

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Fulvio Pegoraro

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